Citi (C) may cut a deal with regulators in which it may be forced to buy back the auction-rate securities (ARS) it sold clients, presumably at face value. This is probably a fair outcome.

Most clients that are now stuck with ARS probably had no idea that the market could seize up. Legally, except in cases of outright misrepresentation, they bear some responsibility for this: "Like cash" is not "cash," and there's no free lunch.

But the professionals at Citi, UBS, et al, should have known the risks of the ARS market and steered clients away. Clients weren't trying to shoot the moon, after all: They were trying to preserve capital and flexibility (the two major benefits of cash). Advising clients to buy ARS may not have been fraud, but it was horrible advice.

WSJ: If Citigroup reaches an agreement with regulators, which as of late Tuesday wasn't certain, the firm could be forced to spend more than $5 billion to buy out individuals, charities and other investors whose cash is tied up in the frozen auction-rate-securities market, according to people familiar with the negotiations. It also could include a fine of as much as $100 million, according to these people.

Meanwhile, if Citi has to come up with another $5 billion, that's yet more pressure on the balance sheet. It will be interesting to see what value the firm places on the now illiquid ARS when it repatriates them. Let's hope it's not 100 cents on the dollar.